CRN Exclusive: ScanSource Storms Into Telecom-Cloud Services With Deal To Buy Recurring Revenue Powerhouse Intelisys

ScanSource has agreed to buy master agent Intelisys Communications for $83.6 million plus earn-outs in a deal aimed at accelerating recurring revenue telecom and cloud services among its traditional communications resellers.

The deal represents a stunning bid by the $3.2 billion distributor with a traditional on premise VoIP and videoconferencing business to disrupt the value-added distribution landscape with a new recurring revenue telecom cloud services portfolio.

"This is less about the technology than it is about business transformation," ScanSource Chief Technology Officer Greg Dixon told CRN. "Our customers are going to see the big opportunity outside the building now. It's a wide open space for them."

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ScanSource VARs have typically only installed network equipment that operates inside of buildings, Dixon said, leaving external network connections and support to partners of master agents like Intelisys.

Intelisys, which had gross commissions of $120 million in 2015, brings a broad and deep recurring revenue portfolio of traditional telecom and cloud vendors to ScanSource including Comcast, Verizon, Time Warner Cable, Equinix and even fast growing cloud services from Google and Microsoft.

The marriage of ScanSource's hardware and software mastery with Intelisys's network and connectivity expertise and more than two decades of recurring revenue experience will help ScanSource's partner community get into supporting hosted voice and cloud offerings delivered from a remote server in an off-premise data center, Dixon said.

Up until now, telecom resellers for the Greenville, S.C.-based distributor drove just 10 to 20 percent of their business from recurring sales, and instead have generated most of their revenue from one-time, on-premise installations of server, software and VoIP equipment, according to Dixon.

Although Intelisys's channel consists primarily of traditional agents, the 120-person Petaluma, Calif.-based company has courted early-adopter VARs and IT solution providers to its partner community for the past four years, helping them move away from a commoditizing, unsustainable business model, according to Andrew Pryfogle, Intelisys's senior vice president of cloud transformation.

Intelisys therefore already has programs in place to help ScanSource's telecom resellers adjust to the new cashflow model, Pryfogle said, including an advanced commissions program that starts paying commissions at the point a deal is booked, as well as a partner investment program that puts cash in the pockets of solution providers to help them grow their business.

"We have been working on helping VARs accelerate this pivot for a long time now, and we've had a lot of success in doing it," Pryfogle told CRN exclusively. "Now, we get to address a dramatically larger market opportunity."

For legacy Intelisys partners, becoming part of ScanSource will allow them to get a larger share of their client's technology spend by enabling them to move beyond connectivity services and offer a more complete solution, Pryfogle said.

For instance, an Intelisys partner participating in the digital part of a telephone or videoconferencing-type offering can now work with ScanSource's hardware and technology custom configuration center and provide the hardware component as well, Dixon said.

The hardware will be delivered using an "as-a-service" model, Dixon said, meaning the item will be added to the per-seat charge the end user pays each month to his or her telecom agent.

"It won't be long before you're not going to be able to differentiate between the telecom agent and the hardware reseller, because they're going to have both become so good at what the other one does," Pryfogle said.

In addition to telecom resellers, Dixon said ScanSource partners in the videoconferencing or physical security businesses will over time take advantage of Intelisys's recurring revenue services. Videoconferencing partners face the same market pressures as voice partners, Dixon said, but will require a lot more bandwidth on demand.

In terms of physical security resellers, Dixon acknowledged that they have been "slower on the uptake" than their telecom counterparts. However, he said the continued migration of video storage off site and transition from analog to digital to IP solutions means they will have to eventually transform their business model to meet their clients' connectivity needs.

Once the deal closes, Intelisys employees will join the Worldwide Communications and Services segment of ScanSource. Very minimal partner overlap exists between ScanSource and Intelisys today, according to Christy Thompson, ScanSource's vice president of worldwide marketing.

In addition to the initial all-cash purchase price of $83.6 million, ScanSource will provide Intelisys with earn-out payments based on earnings before interest expense, taxes, depreciation and amortization (EBITDA) over the next four years. Intelisys' net revenue for the first full year after closing are expected to total more than $34 million with an EBITDA margin of 45 percent to 50 percent.

The acquisition is subject to regulatory approvals and expected to close by Sept. 30, with the Intelisys brand and management team remaining in place.

Comcast, which counts Intelisys as its largest master agent partner, has given the deal its blessing. In fact, Craig Schlagbaum, vice president of indirect channels for Comcast, said he sees the deal as the "next transformation" of the channel with "outstanding" opportunities for both partners and customers.

ScanSource and Intelisys have had an arm's length relationship for the past two or three years, Dixon said, but needed more of a "real partnership" to fully take advantage of what the other has to offer.

"The convergence of hardware and software with network and cloud is creating all sorts of new opportunity for our combined companies," Pryfogle said. "This is a transformational day for the channel."